News and Events
The Science (And Art) of Investing - Lessons from Peter Wright
Mihir Sheth MBA '09
Cayuga Fund Managers had the opportunity to learn from and interact with Peter Wright (CU' 76). Mr. Wright manages an asset base of approximately $400-500 million via a long-short equity strategy. Over a period of seventeen years, he has grown his asset base from $3 million to $400-500 million and has generated average annual net returns of approximately 15% for his investors.
Though his portfolio has a distinct technology bias to it, Mr. Wright highlighted that if one were to divide the allocation by discipline - about 40% of the portfolio would have a value bent, another 40% would be turnaround/value and the balance 20% would be the more traditional growth.
Is investing an art or science? This is one of the big questions Mr. Wright helped answer. He argued that it is both and that this question is best understood by splitting the process of investment into two different businesses - stock picking and money management.
The science in stock picking is simply the process of garnering information. Mr. Wright highlighted that this is a critical part of the process and of course, that there are no shortcuts. You need to constantly speak to company management, suppliers and customers to understand where the company lies in the business cycle, how its product pricing environment is and what its competitors are doing.
The art of stock picking, Mr. Wright said "is looking at the eyes of a CEO and figuring out whether he is a money maker." He elaborated that he would rather invest in a mediocre business with a good manager than in a good business with a terrible manager.
What about money management? Shouldn't that be more science that art? Again, Mr. Wright explained that it was a combination of the two. The science of money management, he explained, is determining what your net long position should be. He follows a very simple yet effective strategy - to reduce the net long exposure as the market goes up and to increase it as the market goes down. This approach allows him to "always be in the game".
The art of money management is figuring out how much capital to deploy - should you lever up or lever down. To explain this further, Mr. Wright compared his strategy to that of a football better - when you are hot and think the market is going up, you increase your net long position by increasing your longs (hence deploying more capital) but when you are cold and think the market is going down, you increase your net long by covering your shorts.
Over the rest of the lecture, Mr. Wright fielded questions from Cayuga Fund managers and of course, shared some interesting stock picks and themes that his firm is working on (including the current favorite - green energy!). He also detailed his thoughts on the current investing environment and how it compares to the tech boom/bust; how he uses the analyst community and the catalysts for shorting stocks.
Click here to access the full video of Mr. Wright's presentation.
